If you're self-employed, you may have felt the sting of new mortgage rules and regulations. They may have interfered with your ability to get financing and if they haven't, they will soon.
That's because the Stated Income Program that allowed borrowers to qualify using a higher salary amount, is no longer available. For example, if you claimed $20,000 on your income taxes, you could qualify using $60,000 worth of annual income. Your income would get confirmed by the lender's discretion about whether or not it was likely you did, in fact, earn more than you claimed.
With the stress-test in effect and new rules on the horizon, self-employed are going to find it even harder to secure competitive interest rates and qualify for an adequate amount of mortgage financing.
If you weren't aware, major banks and other "A" lending facilities, require a two-year average of Line 150 (claimed taxes) for the self-employed. If those numbers don't add up to what you require to be approved, your application will get declined. Add the new stress-test to this, that makes borrowers have to qualify at 4.99% or higher, financing with a major bank is somewhat of a miracle.
So, what does this mean?
Self- employed borrowers have two options: 1. Take a higher interest rate from an alternative lender who doesn't have to "stress-test" its borrowers and can also work off a Statutory Declaration declaring Income and bank statements or 2. Claim more on their taxes and pay more to the Government, forfeiting some of their tax privileges.
When it comes to who can help.
In the new year, it will come down to which brokers can offer their self-employed clients better deal and rates. The relationships brokers make with lending partners will be paramount to the services they can provide. Mortgage Edge, with whom I am affiliated, has made 2017 a year of reaching exclusive lending deals with select lenders not made available to every brokerage. These lenders work with equity (favouring equity over income) and exclusively self-employed individuals.
In conclusion, if you are self-employed then what the new rules mean for you is being offered a slightly higher rate than what is deemed the most competitive. So for example, if current rates are 3.25% for a five-year fixed rate mortgage, then you may be offered 4.2%.
Depending on your financial situation, it may be worth to take a higher interest rate and still have a chance at home ownership or consolidating unsecured debt to save money, then to pay more income tax unnecessarily. Figuring out what works best is usually done in a comprehensive evaluation of both scenarios and determining what works for you.
If you have any questions, please feel free to contact me, and we can go through your options together.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
411 Queen St.
15 Wertheim Court, Suite 210
Richmond Hill, Ontario
Sarah A. Colucci, Mortgage Agent Lic. M14000929
Mortgage Edge, FSCO Lic. 10680